Multivariate decision accuracy and the presentation of accounting information

Since multivariate graphics provide spatial integration, summarization and comparison of information, they may provide the means for improving decision-making. This study tests for the incremental benefit of multivariate graphics over a tabular format, by comparing the outcomes for tabular–graphical combination formats with tabular-only formats in an experimental environment. This is an area where research has been sparse and where existing results are inconsistent.The study examines the interactive influence of presentation format and information complexity on multivariate decision accuracy, to determine the most effective presentation format for the performance of multivariate decision tasks of varying complexity. Results show a significant interaction between presentation format and information complexity to affect multivariate decision accuracy. When information complexity is low, presentation format has no impact on accuracy. However, when information complexity is high, the tabular-alone format shows the highest accuracy. The advantages of graphical and pictorial formats reported in earlier studies are not supported, a finding which has significant implications for the manner of disclosure of financial statements through graphical means.     

The interplay between cost accounting knowledge and presentation formats in cost-based decision-making

Most studies on cost-based decision-making examine the profit impact of cost reports that rely on different methods to allocate costs. In practice, firms’ cost reports often employ the same cost allocation method with subtle variations in the way that the cost data are presented. This paper examines experimentally the profit impact of a cost report’s presentation format in relation to a decision maker’s level of cost accounting knowledge. Using a customer profitability report prepared using activity-based costing and presented in either a tabular or a graphical format, participants analyze a complex pricing and resource allocation task that affects firm profitability. The results suggest a strong relation between presentation format and cost accounting knowledge. Specifically, decision makers with a low level of cost accounting knowledge attain higher profits when they use a graphical format in comparison to a tabular format. More surprisingly, graphs (versus tables) have an adverse effect on profits for users with a high level of cost knowledge. This result has broad implications: in order to facilitate the decisions of a variety of users of accounting data (e.g. managers, external investors, etc.), firms may need to adapt the presentation format of their accounting data to the level of accounting sophistication of the users.     

A note on perceptions of auditors’ internal control report mandated by the PCAOB: Can reformatting the report enhance perceived value added?

The auditor’s report is a critical link in communicating financial data to users. Because of substantial audit costs incurred in integrated audits, the perceived value added by the auditor’s report becomes even more important. The auditor’s report prescribed by Auditing Standard No. 2 (and the new Auditing Standard No. 5) issued by the Public Company Accounting Oversight Board (PCAOB) includes a limitations paragraph. The SAS 58 audit report format that has been in use over 15 years does not contain a limitations paragraph. The SAS 58 report likely serves as a mental frame of reference (a referent report) for users evaluating other independent auditor’s report formats relating to assurance services, including the AS2 and AS5 reports. Whether inclusion of a limitations paragraph could adversely affect the users’ evaluation of the AS2 report is the focus of this study. In light of the publicity given to fraudulent financial reporting and other prevailing economic/environmental conditions, it is reasonable for users to expect that the auditor’s report provide a high degree of assurance regarding material fraud.We extend the [Foster, B. P., McClain, G., Shastri, T. (2005). A note on Pre-Sarbanes-Oxley Act users’ and auditors’ perceptions of a limitations paragraph in the auditor’s internal control report. Research in Accounting Regulations, 18, 195-217] study, by focusing on the AS2 report using data obtained about user perceptions from a field experiment conducted with MBA students. Results suggest that users perceive that an internal control report format without the limitations paragraph will enhance the readability and reliability of the report, and reduce the level of accommodation (additional information) required for decision making. Users perceive that the auditors’ exposure/liability is likely to remain substantially the same whether or not the report format includes a limitations paragraph. Also, users perceive that incorporating fraud wording would further enhance the readability and reliability dimensions of the internal control report format without the limitations paragraph. Taken collectively, the auditor’s report format with fraud wording, but without the limitations paragraph likely maximizes economic benefit accruing to users by minimizing their information risk. Policy-making bodies may find the results and approach taken in this study useful to evaluate report formats for assurance services.     

Brexit disclosure – companies’ honest or bogus perceptions of risk?

Motivated by the recent FRC Brexit-risk reporting guidance, we investigate empirically how internationally diversified companies and those operating in industries with high/low exposure voluntarily responded to this. The paper also examines the pessimistic tone of risk disclosure in annual reports by employing Loughran and McDonald (2011)’s business dictionary capable of gauging various attributes of uncertainty. We find that while almost all FTSE 100 companies discuss this topic in their 2016 to 2019 annual reports, more international involvement results in a greater amount of information and fewer Brexit risk factors. This suggests that while internationally diversified companies respond to more pressure from regulatory requirements, they have already taken internal measures to minimize their exposure to Brexit and therefore, have downgraded their assessment of Brexit risks and uncertainties, and report it to investors accordingly. The results hold true regardless of the location of risk disclosures in the Strategic report and Financial Statements and notes. We also reveal evidence that there are some differential effects among industries depending on the exposure to the Brexit shock. Finally, our results show that internationalisation and industry exposure explain some variation in the negative tone of Brexit discussions. The increased risk reporting and negative tone may be driven by either an intentional bias or justifiably, by a lack of managerial information endowment (Dobler, 2008).     

The effect of experience and complexity on order and recency bias in decision making by professional accountants

Recently, questions have been raised regarding the impact of experience on the susceptibility of professional accountants to judgment bias—particularly order and recency biases as predicted in the Belief‐Adjustment Model. The Belief‐Adjustment Model predicts recency effects will always exist in complex decision domains (regardless of experience). Complexity is defined within the model as a function of task familiarity and information load. The prior studies on experience and bias in accounting domains have focused on varying task familiarity and have found that task familiarity can mitigate order/recency bias. In this study, complexity is operationalised through heavy information load (a condition more consistent with professional accounting environments) while maintaining a high level of task familiarity. Two experiments were conducted. The first experiment utilised a going concern decision using highly experienced partners and managers. The second experiment was conducted in the insolvency domain and used 87 experienced insolvency practitioners. The results indicate that experience does not mitigate order/recency bias under conditions of heavy information load.     

Internal control audits: Judges' perceptions of the credibility of the financial reporting process and likely auditor liability

This paper reports the results of a study in which fifty-seven sitting United States judges participated in a behavioral experiment to assess the perceived credibility of the financial reporting process and the legal risk auditors bear under conditions where they provide an internal control audit report (vs. no report) under two corporate governance environments. We find that participating judges believe internal control audits provide enhanced assurance that intentional misstatements do not exist and also serve to provide elevated protection to the public, but only under conditions of a strong corporate governance environment beyond current regulatory requirements. We also find that, after being informed of an undetected material fraud, judges who currently have high expectations of the auditing profession find auditors more liable when an internal control audit report has been issued (as compared to when no such report has been issued).     

公司动机、审计师声誉和自愿性内部控制鉴证报告——基于A股公司2008—2009年年报的经验研究

上市公司是否自愿披露内部控制鉴证报告,不仅取决于公司自身的披露动机,而且取决于审计师是否愿意出具内部控制鉴证报告。本文利用沪深两市上市公司在2008—2009年年报中自愿披露内部控制鉴证信息所带来的研究机会,实证考察了内部控制鉴证报告这一特殊的自愿信息披露行为的决定因素。研究发现,降低代理冲突和传递信号不仅是上市公司自愿披露内部控制鉴证报告的主要动机,而且是其自愿提高鉴证信息披露质量(扩大鉴证范围和提高保证程度)的主要动机;审计师声誉越高,越不愿意出具内部控制鉴证报告和为公司的内部控制提供高程度保证;大股东与中小股东之间的代理冲突以及内部控制质量会显著影响审计师对鉴证风险水平的评估,进而影响内部控制鉴证报告的鉴证范围和保证程度。     

The impact of confidence interval information on probability judgements

Previous efforts to demonstrate the value of confidence interval financial statements for credit evaluation and investment decisions have met with limited success. The present study examined the impact of nonfinancial confidence interval reports on predecisional behavior. A Bayesian revision task was used to investigate the impact of report type, information system uncertainty and decision problem uncertainty on the accuracy of probability judgements. All three variables influenced task performance. Moreover, subjects given confidence interval reports outperformed those who were given single-figure reports when significant information system and decision problem uncertainties were present. The results obtained here suggest several facets of the decision setting which may influence the value of confidence interval financial statements.     

Annual report readability and the cost of equity capital

Using a large panel of U.S. public firms, we examine the relation between annual report readability and cost of equity capital. We hypothesize that complex textual reporting deters investors' ability to process and interpret annual reports, leading to higher information risk, and thus higher cost of equity financing. Consistent with our prediction, we find that greater textual complexity is associated with higher cost of equity capital. Our results are robust to a battery of sensitivity checks, including use of multiple estimation methods, alternative proxies of annual report readability and cost of equity capital measures, and potential endogeneity concerns. In addition, we hypothesize and test whether the nature of the relation between readability and cost of capital depends on the tone of 10-K filings. Our results show that the effect of annual report complexity on cost of equity is greater when disclosure tone is more negative or more ambiguous. We also find that the effect of annual report readability on cost of equity capital depends on the degree of stock market competition, level of institutional investors' ownership, and analyst coverage.     

Internal control material weakness, analysts’ accuracy and bias, and brokerage reputation

The main purpose of this paper is to examine the impact of internal control material weaknesses (ICMW hereafter) on sell side analysts. We find that ICMW reporting firms have less accurate analyst forecasts relative to non-reporting firms when the reported ICMWs belong to the Pervasive type. ICMW reporting firms have more optimistically biased analyst forecasts compared than non-reporting firms. The optimistic bias exists only in the forecasts issued by the analysts affiliated with less-highly-reputable brokerage houses. The differences in accuracy and bias between ICMW and non-ICMW firms disappear when ICMW disclosing firms stop disclosing ICMWs. Collectively, our results suggest that the weaknesses in internal control increases forecasting errors and upward bias for financial analysts. However, a good brokerage reputation can curb the optimistic bias.     

Target price forecasts: The roles of the 52-week high price and recent investor sentiment

This paper reveals that in addition to fundamental factors, the 52-week high price and recent investor sentiment play an important role in analysts’ target price formation. Analysts’ forecasts of short-term earnings and long-term earnings growth are shown to be important explanatory variables for target prices; equally, the 52-week high price and recent investor sentiment are also shown to explain target price levels and especially target price biases. Our analysis additionally reveals that analysts place greater weight on these two non-fundamental factors in settings with greater task complexity and to some extent in those with greater resource constraints. Conversely, on balance, the results suggest that this increased reliance does not translate into an increased impact per unit of each non-fundamental factor on forecast bias. Finally, our results show that target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies. However, in an internally consistent fashion, the informativeness of target prices for future returns is significantly reduced when greater weight is placed on either the 52-week high or recent investor sentiment in the target price formation process.     

Customer Profitability Analysis Reports for Resource Allocation: The Role of Complex Marketing Environments

Most decision making research in management accounting remains focused on cost information in a production context. Little is known on the relevance of customer profifitability analysis (CuPA) reports, which more accurately reflect revenue and marketing support variations acrosscustomers, for marketing decisions. This study uses an experimental design to examine the impact of such reports on resource allocation decisions (that affect the firm's profits) in marketing environments varying in complexity. The main result of the experiment suggests that the value of CuPA reports depends on the complexity of the marketing setting. Only in a highly complex marketing setting do they enhance resource allocation decisions and resultant firm profitability. Conversely, in the simple marketing environment, decision makers can combine their traditional volume-based cost data with other available types of feedback to perform as well as under a more accurate CuPA report. These findings on complexity contrast with those of a prior study in a production context ( Gupta and King, 1997 ). It is argued that improvements in the current research design, in the form of regularly updated profitability reports and concerning accuracy, increase the relevance of CuPA reports in a complex marketing setting.     

基于会计相关性的企业内部报告地位与价值

本文从会计相关性对内部报告的需求出发,首先探讨了企业内部报告的内涵,明确了企业内部报告与外部报告的关系,以及企业内部报告的主导地位。在此基础上,分别从企业内部报告与管理会计创新,企业内部报告与财务报告变革,企业内部报告与内部控制实施,企业内部报告与财务分析发展,企业内部报告与公司理财完善五个方面,论述了企业内部报告的理论价值与应用价值。随着企业内部报告体系的建立,管理会计将从基于会计的管理转向基于管理的会计;财务报告的变革将以内部报告创新为基础;内部控制实施的信息将更加系统;财务分析将从基于投资者的财务分析发展到基于管理者经营的财务分析;公司理财将更加注重资本经营、资产经营、商品经营和产品经营的协调统一。     

Impact of Segment‐level Natural Resource Operational Risk Reporting on Earnings Predictions

Non‐financial reports alert investors to operational risks associated with issues such as insufficient access to natural resource inputs and related costly interruptions to production, while segment‐level reports alert investors to operational risk distribution across a firm. An important issue, to date unexplored, is how segment‐level non‐financial reporting has an impact on earnings predictions. We report the results of an experiment used to examine how mining company segment‐level water reports affect investors' earnings predictions, where water reports indicate whether the firm and its segments will have access to sufficient water to meet production needs. We find that investors do not change their earnings predictions when firm and segment‐level reports indicate low water risk but they do revise down their earnings predictions when firm and segment‐level water reports indicate high water risk. This is consistent with investors responding to the additional information provided in segment‐level reports confirming that water risk is high across the firm. Regardless of whether firm‐level water reports indicate high or low water risk, when segment‐level reports indicate that one segment is low water risk and another is high water risk, investors revise down their earnings predictions. This is consistent with investors recognizing that natural resource operational risk concentration in one segment can affect earnings more than evenly‐distributed risk. Overall, our findings suggest that belief‐adjustment theory explains how investors react to prospective operational risk information contained in segment‐level water reports according to the similarity of the segment‐level risks, and that this information is factored into earnings predictions.     

The effects of experience and task difficulty on accuracy and confidence assessments of auditors

This study extends prior research in psychology and auditing by examining the effects of audit experience and task difficulty on control risk evaluation. It also examines whether the effect of framing is mitigated by the simultaneous presentation of information. Ninety‐eight auditors performed a control risk evaluation task and recorded their judgement and their confidence. We find that judgement confidence increases with audit experience and that judgement confidence decreases as perceived task difficulty increases. However, we find no relation between audit experience and judgement accuracy or between perceived task difficulty and judgement accuracy. In addition, we find a significant negative relation between judgement confidence and judgement accuracy, which indicates that the participants' confidence is not appropriate. As expected, there is no framing effect when information is presented simultaneously.     

Analysing the determinants of narrative risk information in UK FTSE 100 annual reports

We investigate the relationship between the quantity of narrative risk information in corporate annual reports and ownership, governance, and US listing characteristics. We find that corporate risk reporting is negatively related to share ownership by long-term institutions, and thus the results of this study put forth that this important class of institutional investor has investment preferences for firms with a lower level of risk disclosure. Concerning governance, we find that different types of board director fulfil different functions, with both the number of executive and the number of independent directors positively related to the level of corporate risk reporting, but not the number of dependent non-executive directors. This supports a recent emphasis in the UK on the independent aspects of non-executive directors for good corporate governance. Separate investigation of business, financial, and internal control aspects of risk reporting that correspond to the three classes of risk-reporting guidance in the UK reveals that the pattern of risk information in the annual report may be dependent upon the form that reporting regulation takes.     

Trust and delegation

This paper studies operational risk in the hedge fund industry using due diligence reports. Many funds suffer from operational problems, including limited disclosure of legal and regulatory issues. We use direct evidence of inadequate or failed internal processes to derive a canonical correlation-based measure for operational risk consistent with the Basel definition. It controls for selection bias using an extension of Heckman's (1979) procedure. Operational risk increases the likelihood of subsequent poor performance and fund disappearance, but does not influence investors’ return-chasing behavior. Our study emphasizes the importance of information verification in the context of financial intermediation.     

Annual report readability and corporate agency costs

Annual reports are the main sources of information for outside investors’ investment decisions and enable shareholders to supervise the management. Difficulties with the readability of these reports may therefore have serious consequences. Using 19,221 firm-year observations of Chinese A-share listed firms from 2001 to 2015, we investigate the association between annual report readability and corporate agency costs, where readability is proxied by report file length and/or file size. We find that firms with better annual report readability experience lower agency costs, and the negative association between readability and agency costs is more pronounced in firms with higher external audit quality, internal control quality or analyst coverage. These results hold after several robustness checks. The positive effect of annual report readability is stronger in private firms than in state-owned enterprises, and becomes stronger after the implementation of new accounting standards in 2007. Readable annual reports can help in monitoring corporate insiders’ opportunistic behavior and thus reduce agency costs.     

非财务信息披露与分析师预测——基于深市上市企业社会责任报告的实证检验

以深市上市企业披露的社会责任报告作为非财务信息的替代变量,实证检验了非财务信息披露质量与分析师盈利预测的关系。多元回归分析结果表明,企业社会责任报告披露质量越好,其分析师盈利预测越精确,并且在财务透明度低的企业中,这种正向关系更显著。这说明社会责任报告披露的这类非财务信息对分析师预测不仅具有信息含量,而且能够通过对财务信息的补充作用,缓解财务不透明对分析师预测精度的不利后果。     

Board independence,internal information environment and voluntary disclosure of auditors’ reports on internal controls

When there is high information asymmetry between directors and managers, independent directors do not have enough information to perform their functions. Only when faced with a good internal information environment can such directors acquire enough information to provide advice and monitor managers, and only under these conditions can increasing their proportion on the board effectively reduce agency problems, such as driving managers to disclose information to investors. Using a sample of Chinese listed firms that voluntarily disclose their auditors’ reports on internal controls from 2007 to 2009, this study explores how the information acquisition costs of independent directors affect their monitoring effectiveness by investigating the disclosure decisions of their internal control audits. We find that when the information asymmetry between insiders and outside directors is low and the proportion of independent directors on a board is high, a firm is more likely to voluntarily disclose its internal control audit report.